Schlumberger NV betting big money on oil and gas projects

Its new business model involves the company in decision making capacptity throughout the oilfield management supply chain, thus sparking interest in its rivals who are wondering whether to follow suit.

In a significant development, Schlumberger NV, the world’s largest oilfield services company, is on a new business model that will see it spend billion of dollars buying stakes in its customers’ oil and gas projects – the same ventures it supplies its equipments and expertise.

The company told investors that this new business model will provide it with decision making ability vis-a-vis oilfield management, drilling decisions, and even on hiring.

This expanded authority is seen as saving Schlumberger from bidding for each of the many jobs that typically require separate contracts on a large drilling project.

This essentially locks out competitors from its projects.

This strategic gamble could potentially upend the service business model across the industry, with rivals including Baker Hughes, a unit of General Electric Co, considering to adopt similar strategies.

Although the model could significantly boost profits for a given job, on the downside it will also increase its exposure to global oil price variations and potentially big losses if individual projects fail to take off.

These considerations have led some analysts to question whether the traditionally conservative firm is taking on too many speculative projects too quickly.

According to the company’s financial disclosures, Schlumberger has already taken hundreds of millions in impairments on some of these joint ventures.

Despite some early setbacks, Schlumberger has already committed more cash to its Schlumberger Production Management, since its launch in 2011. Earlier this summer, Patrick Schorn, Schlumberger Executive Vice President told investors that it had generated $1.4 billion in revenues.

The company’s investments have the firm co-managing about 230,000 barrels a day of oil and gas output at the end of 2016 – about as much as one of the largest U.S. independent producers, Pioneer Natural Resources.

In 2017, the company has increased its financing role and has opened a standalone investment fund to provide financing for its ventures.

Schlumberger did not disclosed the size of the fund.

Typically, such ventures require a huge array of skill and a risk appetite generally found at large integrated oil companies such as Exxon Mobil Corp and Chevron Corp.

Going by two of its latest partnerships, an Argentina shale development with YPF SA and a deepwater liquefied natural gas project off the coast of Equatorial Guinea and, involve decision-making and operational authority similar to that typically held by multinational oil producers.

Significantly, in June this year, Schlumberger had agreed to invest $700 million in an oil exploration project with Nigerian National Petroleum Corp and First Exploration & Production that would require global oil prices be in the range of $50 to $60 a barrel to achieve a 20% profit.

Current oil prices are struggling to break out from the bottom of that range.

“I like the long-term aspect of it – the fact that they are telling frack crews where to work, and using their own equipment more efficiently than might be used by some other operator,” said Mike Breard, head of Hodges Capital, a Dallas-based wealth management firm, which invests in oilfield service companies.

However its massive write downs have stirred investors on Wall Street to question whether it should take a more cautionary approach with its oil production strategy.

The firm’s production division “used to focus on production management of well understood low-risk oil fields,” said Colin Davies, a Bernstein oilfield services analyst. “Now it has expanded into frankly somewhat more speculative ventures.”